The American economy needs small business. The majority of private sector employees in the country work for a small business, and everyone deals with small business for at least part of their daily needs. Entrepreneurship is idealized in America to the point where many people dream of starting their own business and finding the freedom and independence it brings.
For these reasons and many others the Small Business Administration was formed by an act of Congress in 1954 to support American small business. From counseling and networking to professional advice and financing, the SBA has all sorts of activities that are designed to help your business take off. In particular, their loan program is something that many entrepreneurs hear a lot about but do not have in depth knowledge of.
Starting From The Top
The SBA gets loan money into the hands of small businesses in a number of different ways. The most common is by working through intermediaries, financial institutions that lend their own money with a guarantee from the SBA that if the entrepreneur defaults, the SBA will pay back at least part of the tab.
Before we dive into the different types of SBA loans – everything from SBA Disaster loans to SBA 504 and SBA Express loans, we must discuss the basic program. We’ve mentioned intermediaries. This is how their 7(a) loans – the most popular option – work. These are loans backed by the SBA made through intermediaries to small businesses – small here being defined as those with less than $15,000,000 in revenue. These loans themselves can be quite large, up to $5,000,000 each. 7(a) loans can be given to businesses in any number of different industries, from manufacturing and retail to real estate. All the entrepreneur has to do in addition to a regular loan is show that they could not receive the funding they need at a reasonable rate through other channels.
Many business owners are intimidated by this kind of loan for no good reason. There are all sorts of misconceptions out there about them, but the SBA itself provides lots of good information that ought to set people straight on the issue. Perhaps the most common fear is that SBA loans are expensive. It is true that there is an additional service fee added to the loan, however this is almost always below 3.5%. Oftentimes it is even less than 1% of the total value of the loan. The SBA builds this into the loan, amortizing it over the life of the loan.
This is done because the SBA loan program is entirely self-sustaining. It does not receive money from the government. Since taxpayers are not supporting the loan program, it has to fund itself. The businesses that benefit pay a slight premium in order to sustain the program.
SBA Express Loans
One of the more popular types of SBA loans is the SBA Express loan. These are different from the standard 7(a) loan program chiefly due to the time it takes to qualify. While a standard SBA or commercial loan can take three months or even more to qualify for, and Express loan can be filed in as little as 36 hours. This is huge for some businesses that need cash right away. Consider an entrepreneur that has cash flow issues. If he can’t pay his suppliers this month then they will not deliver next month.
This could ruin his business. A standard loan would not be completed quick enough to fix the problem. SBA Express loans allow him to finance his needs rapidly. They tend to be smaller than the standard SBA loan as there is a $350,000 cap on these, however for most businesses that is enough.
Others might use this kind of loan to seize an immediate market opportunity. Maybe a parcel of land in a key area has just gone on the market or a unique niche has opened in the market and the company needs cash right away to take advantage of it. If this is the case a traditional loan will be of limited value.
Regardless of your need, there is probably an SBA loan option for you. In a short piece like this, we can only touch on a few of them very quickly. For a full list of SBA loans, see the SBA website. They offer everything from standard 7(a) loans to Disaster loans to their Advantage program – meant to benefit underserved loan areas – to loans targeting veterans. Chances are there is an SBA backed product that will benefit you!
